Earnings Preview: Xcel Energy

Xcel Energy Inc. ( XEL - Analyst Report ) , an energy holding providing natural gas, electricity and other products and services, is slated to release its third-quarter 2012 earnings result before the market opens on October 25, 2012.

Recap, Second-Quarter 2012

Xcel Energy reported mixed overall performance in the second quarter of 2012 posting a net adjusted income of 38 cents per share, beating the Zacks Consensus Estimate of 35 cents per share and year-ago earnings by 2 cents. Higher electric margin, resulting from various rate hikes and warmer-than-normal weather across all its service territories were responsible for the bottom-line growth.

Quarterly revenue suffered a setback as sales from the gas distribution business plunged by 24.1% along with a 4.3% drop in electric segment sales. Total revenue fell substantially by 6.7% to $2.28 billion from $2.44 billion in the year-ago quarter. Moreover, revenue was way below the Zacks Consensus Estimate of $2.47 billion.

Guidance 2012

Xcel Energy estimates earnings per share for 2012 to be on the lower end of the guidance range of $1.75–$1.85 per share. Operating and maintenance expenses of the company are expected to climb by 1% year over year, while depreciation expense is expected to increase in the range of $40 million to $50 million from 2011 levels.

Zacks Consensus

The Zacks Consensus Estimate for the third quarter 2012 is 71 cents per share, up 3.08% from 69 cents reported in the comparable quarter, last year. At present, the Zacks Consensus Estimate for earnings ranges from 68 cents to 75 cents per share.

For 2012, the Zacks Consensus Estimate is $1.78 per share, slightly higher than its previous year-end earnings of $1.72 per share. The current Zacks Consensus Estimate ranges between $1.75 and $1.80 per share.

Estimate Revisions Trend

Agreement

For third quarter 2012, none of the 8 analysts providing estimates have revised their estimates over the last 30 days. A similar trend is witnessed from the 15 covering analysts for 2012 number over the last month.

Magnitude

The Zacks Consensus Estimate for the third quarter remained unchanged at 71 cents in the last 7 as well as 30 days. For 2012, the consensus estimate has also remained static at $1.78 for the past week and month.

Surprise History

With respect to earnings surprises, Xcel Energy Inc. has reported favorable bottom-line performance in the previous two quarters of 2012 as well as in the third quarter of 2011, surpassing the corresponding Zacks Consensus Estimates. The fourth quarter 2011 earnings miss was however an exception. The earnings surprise in the last four quarter ranges from (3.3%) to 8.6%. The average surprise over the last four quarter remained a positive 3.5%.

Our View

Xcel Energy has been a prominent player in the US energy market and is a pure play, fully regulated, vertically integrated electric and gas utilities with the potential to grow EPS 5%–7% over the long term. The company continues to be environmentally proactive, with its large-scale wind energy projects, its biomass plant in the Midwest and significant investments in pipeline and transmission businesses.

Nonetheless, regulatory obstacles, inconsistent weather patterns and commodity price volatilities are certain generic limitations the company needs to watch out for. In addition, increased property tax of $24 million is expected to drag down the company’s bottom-line by roughly $0.03 per share in 2012.

Xcel Energy operates in an competitive energy market and faces stiff opposition from companies like American Electric Power Co. Inc. ( AEP - Analyst Report ) and CenterPoint Energy, Inc. ( CNP - Analyst Report ) .

Currently, we are maintaining a long-term ‘Neutral’ recommendation on Xcel Energy Inc. The company has a Zacks #4 Rank implying a short-term Sell rating on the stock.